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BLOG. 2 min read

Optimizing Returns—Unveiling Effective Tax Loss Harvesting Strategies

Tax loss harvesting is a strategy used by investors to offset capital gains and reduce their tax liability by selling securities at a loss. There are several tax loss harvesting strategies:

  1. Offset gains: Sell securities that have incurred losses to offset any realized capital gains. Capital losses can be used to counterbalance and reduce capital gains realized in the same tax year, reducing overall tax liability.

  2. Utilize short-term losses against short-term gains: Short-term capital losses (from assets held for one year or less) can be used to offset short-term capital gains, which are typically taxed at a higher rate than long-term gains.

  3. Use long-term losses against long-term gains: Long-term capital losses (from assets held for more than one year) can be used to offset long-term capital gains, helping to reduce taxes on gains from investments held for an extended period.

  4. Offset ordinary income: If capital losses exceed capital gains for the year, investors can use up to $3,000 of excess losses to offset ordinary income. Any remaining losses can be carried forward to future years.

  5. Wash sale rules: While harvesting losses, investors must avoid triggering wash sale rules by refraining from repurchasing the same or substantially identical securities within 30 days before or after the sale that generated the loss.
    1. The wash sale rules under IRC Sec 1091 are set to prevent investors from claiming artificial losses by selling securities at a loss and repurchasing them shortly thereafter. The IRS defines a wash sale as the sale of a security at a loss followed by purchasing a substantially identical security within 30 days before or after the sale.
    2. To avoid triggering wash sale rules and losing the ability to claim the loss for tax purposes, investors can consider the following:
      1. Wait for 30 days.
      2. Buy a similar but not identical security.
      3. Adjust position size “double down”: If you want to maintain exposure to a particular security while avoiding the wash sale rule, consider adjusting the position size by buying or selling related securities to avoid triggering the rule. Note: This can help, but increases your exposure.
      4. Purchase a basket swap.
  6. Maintain portfolio balance: When selling assets for tax loss harvesting purposes, investors can replace them with similar securities to maintain their portfolio's asset allocation and investment strategy.

  7. Invest in tax-efficient assets, such as index funds or exchange-traded funds (ETFs).

SS&C offers a smart technology solution to support tax-efficient investment decisions, as well as timely and accurate tax reporting and filing. With Tax BrightLine, fund managers have year-round access to real-time data and analytics, powered by intelligent automation technologies. To learn more about how SS&C can help you optimize your tax strategies while meeting tax filing and reporting obligations, read our "Clear Cut Investment Returns Through Real Time Tax Management" whitepaper.

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